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TMI Blog2020 (11) TMI 277X X X X Extracts X X X X X X X X Extracts X X X X ..... here is income not forming part of the total income. No doubt, the expenditure under section 14A includes both direct and indirect expenditure, but that expenditure must have a proximate relationship with the exempted income. Surmise or conjecture is no answer. Reiterate that before rejecting the disallowance computed by the Assessee, the Assessing Officer must give a clear finding with reference to the Assessee s accounts as to how the other expenditure claimed by the Assessee out of the non-exempt income is related to the exempt income. no valid reasons to upset the Tribunal s well-reasoned judgment on this substantial question of law - Decided against revenue. Addition as capital expenditure - Is the Tribunal right in deleting the addition made by the AO on account of capital expenditure? - HELD THAT:- In LH. Sugar Factory and Oil Mills [ 1980 (8) TMI 1 - SUPREME COURT] has concluded that if the advantage consists merely in facilitating the assessee s business operations or enabling management and conduct of the assessee s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched the expenditure would be on revenue account, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x. Suppression of closing stock on account of ground loss at berth No. 9. xi. Capital loss carried on account of treating the income of a firm as business income. 4. Aggrieved, the Assessee carried the matter to the CIT (Appeals). By order, dated 20.12.2012, the Appellate Authority partly allowed the appeal. Then, against the appellate ruling, both the Assessee and the Revenue filed appeals before the Income Tax Appellate Tribunal, Panaji Bench, Goa ( the Tribunal ). Finally, the Tribunal, through its Order, dated 13.09.2013, dismissed the Revenue s appeal; it partly allowed the Assessee s appeal. 5. Against the Tribunal s Order, dt.13.09.2013, only the Revenue appealed to this Court under section 260A of the IT Act. Substantial Question of Law: 6. Through its Order, dated 9 September 2014, this Court framed these substantial questions of law: (i) Is the Tribunal right in deleting the additions made by the AO under section 14 A of the IT Act, read with Rule 8D of the IT Rules? (ii) Is the Tribunal right in deleting the addition made by the AO on account of capital expenditure of ₹ 35,15,625/- by ignoring the decision of the Allahabad High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s funds through the bankers and other financial institutions. The mutual fund officials used to come to the Assessee s doorstep to fill up the forms and to do all other things necessary in that regard. The Assessee only issued the cheques. The AO disagreed. He reckoned that without devoting time and without analysing the nature of the investment, the Assessee could not have invested in the mutual funds. The AO took the view that section 14A clearly applied to the Assessee s case. The AO accordingly invoked Rule 8D and computed the disallowance at 0.5% of ₹ 381,67,09,731/-, the average investment. Then, he disallowed ₹ 1,90,83,548/-. The Assessee appealed to the CIT(A).Rs. Indeed, the appellate authority confirmed the AO s disallowance. Of course, the Tribunal reversed it. Let us see whether the Tribunal s view is sustainable. 12. Section 14A, inserted by the Finance Act 2001 with retrospective effect from 1 April 1962, aims to disallow expenditure incurred in relation to income which did not form part of the total income under the IT Act. This section has to be read with Rule 8D, which provides the method of calculation of disallowance. Section 14A statutorily recogn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income. But the expenditure incurred to earn that income is allowable as a deduction. However, this section and Rule 8D have been amended several times. Those amendments have resulted in highly unfair consequences for Assessees who earn dividend income. The object of exempting dividend income under section 10(34) and income from mutual funds under section 10(33) was to encourage investments in shares and promote savings. 15. Dividends are not taxed in the hands of the shareholder, but it would be incorrect and anomalous, according to the revising author, to state that dividends are a category of income which does not suffer any tax. The object of section 14A is to disallow expenditure on income which has not suffered tax. That said, under section 115-O, the dividend is taxed at the time of distribution at the prescribed rate. That means, tax is paid by the company irrespective of whether an Assessee has income below the taxable limit. Had the dividend been paid directly to him, it would not have suffered tax. There is no provision to file any form seeking an exemption or to claim a refund of the dividend distribution tax for such Assessees. So, to disallow the expenditure in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween the expenditure and the tax-exempt income. Only then would a disallowance have to be effected. This Court, we may note, on more than one occasion, has held that the onus is on the Revenue to establish that there is a proximate relationship between the expenditure and the exempt income. That is, the application of section l4A and rule 8D is not automatic in each and every case, where there is income not forming part of the total income. No doubt, the expenditure under section 14A includes both direct and indirect expenditure, but that expenditure must have a proximate relationship with the exempted income. Surmise or conjecture is no answer. 20. We may further reiterate that before rejecting the disallowance computed by the Assessee, the Assessing Officer must give a clear finding with reference to the Assessee s accounts as to how the other expenditure claimed by the Assessee out of the non-exempt income is related to the exempt income. 21. So, we see no valid reasons to upset the Tribunal s well-reasoned judgment on this substantial question of law. Substantial Question of Law (II): (ii) Is the Tribunal right in deleting the AO s addition of ₹ 35,15,625 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the UP Housing Board. As a matter of policy, the Government was to contribute some amount for constructing the staff quarters for various factories and the balance to be borne by the factory owners and contractor. These staff quarters were to remain the property of UP Sugar and Power Alcohol Housing Board, to be leased out to the factory owners on agreed terms. The appellant Assessee claimed the amount it had paid towards the cost of construction as the revenue expenditure. Then, the Allahabad High Court held that the quarters were freshly built and were exclusively used by the Assessee. Though the Assessee was not the owner, it was entitled to its exclusive use for an unlimited period. On this reasoning, the Court held the expenditure to be capital expenditure. But this Court in Salgaocar Mining Industries has observed that the Allahabad High Court had decided Raza Buland Sugar before the Supreme Court could render its ruling in LB Sugar Factory and Oil Mills (P) Ltd. so that Supreme Court s decision holds the key to our question. 27. In LB Sugar Factory and Oil Mills, the appellant was a private limited company, manufacturing and selling crystal sugar in a factory at Pilibh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. What is material to consider is the nature of the advantage in a commercial sense, and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. 30. L. B. Sugar Factory and Oil Mills has concluded that if the advantage consists merely in facilitating the assessee s business operations or enabling management and conduct of the assessee s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. 31. Thus, guided precedentially by all the above decisions, Salgaocar Mining Industries has accepted the Respondent-Assessee s contention that it is revenue expenditure. 32. So must it be here. We see no other compelling reason to take a different stand. We are, thus, constrained to hold this substantial question of law, too, against the Revenue. Result : 33. For all the reasons we have stated above, we are satisfied that there is no error in the impugned judgment and order of the ITAT. So we answer the substantial questions of law against the Re ..... 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